What is a 'Parity Bond'

A parity bond refers to two or more bond issues with equal rights of payment or equal seniority to one another. In other words, a parity bond is an issued bond with equal rights to a claim as other bonds already issued. For example, unsecured bonds have equal rights in that coupons may be claimed without any particular bond having priority over another. Therefore, unsecured bonds would be referred to as parity bonds with each other. Similarly, secured bonds are parity bonds with other secured bonds.

A parity bond is also referred to as a pari passu or a side-by-side bond.

BREAKING DOWN 'Parity Bond'

Parity bonds are a type of fixed-income securities that are commonly issued by municipalities as a way to gather finance capital. Parity bonds are similar to pari passu securities, which are securities or debts which have equal claims on a right without any display of preference. The term “pari passu” comes from Latin, and means equal footing. For example, in a pari passu security, holders of common shares all have equal rights to claim a dividend without one shareholder having priority over another. 

A series of a fixed-income security may be issued as a parity bond, or include a pari passu clause, in order to establish that it functions in the same way as previously issued bonds.

Unsecured debts will have parity with respect to other unsecured debts, meaning that the bonds have equal rights over the coupon. Secured debts will also have parity with respect to other secured debts, although secured debts will have rights that supersede those of unsecured debts. In other words, guaranteed debts and unsecured debts are not parity bonds concerning each other.

EXAMPLE OF Parity Bond

Parity bonds have equal rights to the coupon, or nominal yield. In fixed income investments, the coupon is the annual interest rate paid on a bond. Consider a $1,000 bond with a 7 percent coupon rate. The bond will pay $70 per year. If new bonds with a 5 percent coupon are issued as parity bonds, the new bonds will pay $50 per year, but bondholders will have equal rights to the coupon.

A parity bond stands in contrast to a junior lien or senior lien bond. A junior lien bond, also called a subordinate bond, has a subordinate claim to pledged revenue as compared to a senior lien bond, which is also called a first lien bond. Unsecured debts are subordinate bonds compared to secured debts.

RELATED TERMS
  1. Bond

    A bond is a fixed income investment in which an investor loans ...
  2. Bond Fund

    A bond fund is a fund invested primarily in bonds and other debt ...
  3. Corporate Bond

    A corporate bond is a debt security issued by a corporation and ...
  4. Bond Yield

    Bond yield is the amount of return an investor will realize on ...
  5. Dollar Bond

    A dollar bond is a U.S. denominated bond that trades outside ...
  6. Rate Level Risk

    Rate level risk refers to the fact that the value of an existing ...
Related Articles
  1. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  2. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  3. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  4. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  5. Investing

    Understand the security types of corporate bonds

    Any investor should be aware of the different security types regarding corporate bonds as well as the direct correlation to potential recovery rates.
  6. Retirement

    Should I Invest in Bonds After I Retire?

    Yes, retirees should invest in bonds, but remember that not all bonds are safe investments. Seek the help of a financial advisor.
  7. Investing

    4 basic things to know about bonds

    Learn the basic lingo of bonds to unveil familiar market dynamics and open to the door to becoming a competent bond investor.
  8. Investing

    The Best Bet for Retirement Income: Bonds or Bond Funds?

    Retirees seeking income from their investments typically look into bonds. Here's a look at the types of bonds, bond funds and their pros and cons.
  9. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
  10. Investing

    6 Ways That Investors Use Bonds

    Learn how the stodgy stereotype of bonds can overshadow the basic and advanced uses of what these investments can do for your portfolio.
RELATED FAQS
  1. What are the risks of investing in a bond?

    Are you thinking of investing in bond market? Learn more about bond market investment risk, including interest rate risk, ... Read Answer >>
  2. How does a bond's coupon interest rate affect its price?

    Find out why the difference between the coupon interest rate on a bond and prevailing market interest rates has a large impact ... Read Answer >>
  3. What causes a bond's price to rise?

    Should you invest into bonds? Learn about factors that influence the price of a bond, such as interest rates, credit ratings, ... Read Answer >>
Hot Definitions
  1. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  2. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  5. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center